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Salary packaging Kym Davis

Edwards Marshall

Introduction

What is Salary Packaging?

What is salary packaging? Types of employers GST issues Popular benefits Consequences of salary packaging

Salary Sacrifice Forego part of future salary for benefits of similar value provided by employer

What is Salary Packaging? (Cont)

What is Salary Packaging? (Cont)

What can be sacrificed Salary & wages Long service leave entitlements (before they accrue) Bonuses & commissions

Why Salary Sacrifice Income tax savings Pass on GST credits Flexibility of employees overall salary package Attract new employees Happier employees leads to retention

Effective Salary Sacrifice Agreement between employer & employee BEFORE work commences (Refer ATO 5 page fact sheet)

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What is Salary Packaging? (Cont)

Types of Employers

What Benefits can be sacrificed Superannuation Exempt Benefits Motor Vehicles Expense Payment Benefits

FBT Employers Wholly Exempt Partially Exempt Rebatable Fully Taxable

Types of Employers (Cont)

Types of Employers (Cont)

Wholly Exempt Employers Undertake religious work in relation to pastoral duties Includes accommodation, meals & household fuels No reportable fringe benefits Salary packaging extremely beneficial as no FBT payable

Partially Exempt Employers Public hospitals, private not for profit hospitals & public ambulance service •

Exempt on first $17,000 of benefits grossed up per employee

PBI’s (Public Benevolent Institutions) •

Exempt on first $30,000 of benefits grossed up per employee

Salary Packaging most beneficial

Types of Employers (Cont)

Types of Employers (Cont)

PBI employee sacrificing $16,000 of mortgage repayments Before After

Rebatable Employers Defined in s 65J of FBTAA, they include

Salary Sacrificed repayments New gross salary

50,000 50,000

Tax Take home pay

(11,100) 38,900

Mortgage repayments Net take home pay Net benefit

(16,000) 22,900

50,000 (16,000) 34,000 (6,060)

-

27,940

• • • •

Charities Schools Unions Non profit organisations

Rebate of 48% on first $30,000 of benefits grossed up per employee Salary packaging can be beneficial

27,940 5,040

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Types of Employers (Cont) Example – Calculation of rebate Vanessa works for rebatable employer Employer provides benefits of $40,000 (grossed up value) Rebate = $30,000 x 46.5% x 48% = $6,696

Types of Employers (Cont)

Fully Taxable Employers All other employers apart from exempt, partially exempt and rebatable employers All benefits provided are subject to FBT Salary packaging still attractive for benefits which are exempt or have concessional treatment

GST Issues

Popular Benefits

Grossing Up Rates Type 1 benefits – employer entitled to claim input tax credits (GST inclusive value grossed up)

Superannuation Most popular benefit sacrificed No FBT No GST Aged based limits – 2006/07

•

Gross up rate = 2.0646

Type 2 benefits – employer not entitled to claim input tax credits •

Gross up rate = 1.8691

Under 35 35 – 45 50+

15,260 42,385 105,113

Budget changes

Popular Benefits (Cont)

Popular Benefits (Cont) Salary sacrifice superannuation contributions

Superannuation Co-contribution Government pays up to $1,500 based on a $1,000 contribution Taxpayer makes after tax contribution Not a salary sacrifice contribution

Salary Level

25,000

50,000

5,000

5,000

5,000

Income tax saving

825

1,575

2,075

Contributions tax

(750)

(750)

(750)

75

825

Sacrificed super

Net Benefit

100,000

1,325

(Consider Government Co-contribution)

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Popular Benefits (Cont)

Popular Benefits (Cont)

Exempt Benefits No FBT payable on the following benefits:

Employee sacrificing $2,750 (GST Inclusive) laptop

• • • •

Laptop computers Portable printers Mobile Phones Relocation expenses

Claim GST credit

Before

After

Salary Sacrificed laptop New gross salary

25,000 25,000

25,000 (2,500) 22,500

Tax Take home pay

(3,225) 21,775

(2,813) 19,687

Laptop purchase Net take home pay Net benefit

(2,750) 19,025

19,687 662

Popular Benefits (Cont)

Popular Benefits (Cont)

Motor Vehicle Benefits Popular salary sacrifice item either via hire purchase or novated lease If novated lease

Motor Vehicle Benefits (Cont) Claim input tax credits (subject to cost base limit) FBT payable on motor vehicle benefits Two methods of valuing motor vehicle benefits

• • • • •

Employee chooses vehicle Employee seeks finance Not included on employers balance sheet If employee leaves take vehicle with them Win/Win

• •

Statutory Formula Operating Cost

Popular Benefits (Cont)

Popular Benefits (Cont)

Example – Second Hand Car Salary $40,000 Car costs $16,500 Car travels 15,001km Lease payments $3,500 Other expenses $3,700 Fully taxable employer Statutory formula used

Car 15,001 km

Before

After 40,000 (6,545) (3,168) 30,287

Employee Contribution

Salary Sacrificed car FBT New gross salary

40,000 40,000

40,000 (3,545) 36,455

Tax Take home pay

(7,950) 32,050

(4,890) 25,397

(6,833) 29,622

Car expenses Net take home pay Net benefit

(7,200) 24,850

25,397 547

26,322 1,472

(3,300)

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Popular Benefits (Cont) Car 25,001km

Popular Benefits (Cont) Before

Salary Sacrificed car FBT New gross salary

40,000 40,000

Tax Take home pay

(7,950) 32,050

Car expenses Net take home pay Net benefit

(7,200) 24,850

After

Employee Contribution

Car 25,001km

Before

Rebatable

40,000 (4,895) 35,105

Salary Sacrificed car FBT New gross salary

40,000 40,000

40,000 (6,545) (906) 32,549

(5,339) 26,373

(6,407) 28,698

Tax Take home pay

(7,950) 32,050

(5,603) 26,946

26,373 1,523

26,883 2,033

Car expenses Net take home pay Net benefit

(7,200) 24,850

40,000 (6,545) (1,743) 31,712

(1,815)

26,946 2,096

Popular Benefits (Cont)

Popular Benefits (Cont)

Expense Payment Benefits Otherwise deductible rule (subscriptions) In-house benefits Meal entertainment Mortgage payments Health insurance

Meal Entertainment Immediately consumed Not sustenance/refreshment Can’t include band or DJ GST ITC’s limited to income tax deductibility Three methods available to value benefit

Popular Benefits (Cont)

Consequences of Salary Packaging

Example - Daughters Wedding $5,000 Before Salary Sacrificed wedding FBT New gross salary Tax Take home pay Wedding Net take home pay Net benefit

Rebatable

50,000 50,000

50,000 44,036

(11,100) 38,900

(9,221) 34,815

(5,000) 33,900

34,815

(4,773) (1,191)

PAYG Reporting Requirements Total taxable value of benefits > $1,000 Benefits excluded include • •

Meal entertainment Car parking benefits

Gross up factor of 1.8691

915

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Consequences of Salary Packaging

(Cont)

Levies, Surcharges & Allowances Grossed-up taxable value of benefits used to calculate • • • •

Medicare levy surcharge Government super co-contribution HELP (HECS) Repayments Child support obligations

Consequences of Salary Packaging

Consequences of Salary Packaging

Levies, Surcharges & Allowances (Cont) Non-grossed up taxable value of benefits used to calculate: • • •

(Cont)

Other Taxes & On-costs Payroll tax – calculated on wages, superannuation and grossed up value of fringe benefits Superannuation guarantee contribution – calculated on wage paid Workcover – calculated on total remuneration

(Cont)

Family tax benefit Child care benefit Parental income test for youth allowance

Consequences of Salary Packaging

(Cont)

Administration Increased administration for employer Employees need to provide appropriate invoices for GST Employer may have an administration charge

Conclusion Only sacrifice future income Increase employees disposable income Employee retention FBT Treatment of different employers Remember on-costs Administration costs Be careful

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